Forced Into Foreclosure – Want to See How it Happens?
TRUE STORY… Two days ago, on Saturday afternoon, I was talking to an old college roommate on the phone. He knows almost nothing about the loan modification process and very little about the foreclosure crisis.
It’s not that he’s oblivious to what’s been going on these last five or six years, he’s a lawyer, a very bright guy, my age, but he lives in Manhattan, so he rents an apartment. Up until a few years ago, he didn’t even own a car.
It’s not like he bumps into a lot of homeowners on a day-to-day basis. From his front door to the closest homeowners would probably mean traveling to Long Island or New Jersey, and I’m pretty sure he flies to LA, Miami or even London, more often than he goes to Long Island or New Jersey.
He answered his phone. “What’s up, Foreclosure Man?”
“You just love that Caller ID feature, don’t you? Most people still go with ‘hello,’ just so you’re aware.”
“I’m sorry, did I throw you off? I’ll wait while you regain your composure.”
“I’m composed. How life in the big city? Have you learned to drive yet?”
“I’m getting there, next week we’re tackling left hand turns, so I’m really looking forward to that.”
“That sounds both fun and terrifying at the same time.”
“So, whatcha’ been up to? Still saving the country one homeowner at a time?”
“Yes, I suppose I am, as ridiculous that sounds.”
As we got into the conversation, I was telling him about a couple I’m currently helping get their loan modified and among other things I was expressing my frustration that the couple shouldn’t even be in the situation they’re in… “… they should never have gone into foreclosure in the first place, the whole thing is just ridiculous,” is what I was telling him.
He was totally confused. “What do you mean?” he asked. “How could someone go into foreclosure that shouldn’t go into foreclosure? Are they making their mortgage payments?”
“Well, no,” I admitted. “They haven’t made a payment in over two years.”
“Okay, then mystery solved… that’s why they’re in foreclosure,” he responded. “Why would you say they shouldn’t be in foreclosure when they haven’t made a mortgage payment in more than two years?”
“Yeah, I get it… it does sound weird. But it’s true. This couple should not be in foreclosure, the whole thing never should have happened,” I said, already tired of explaining before I had even begun. “Look, I’ll show you one of the ways that it happens… and this sort of thing happens a lot more often than anyone would ever think.”
So, I set out to tell him the story of the couple I’d met a couple of months ago… a couple that I’ll refer to as… Ben & Mia Misled… “The Misleds.”
“But to understand how they came to be where they are today, I’ll have to start the story back in 2009,” I warned.
“Uh oh, this is going to be one of your long, drawn out stories, isn’t it? Look, it’s Saturday afternoon around… what, 4:00PM… I’m not sure that I have time for one of those, it’s only a three day weekend and I have to be back at work on Tuesday morning,” he was overly pleased with what he considered to be clever repartee.
“Don’t worry about that… you’re obviously working as a stand-up comedian so I’m sure you won’t be missed.”
“Yeah, so tell me a story, Foreclosure Man… I’ll try not to nod off.”
“And I’ll try not to use any big words so you can stay with the story without having to use Google while I’m talking.”
“How did you know I do that?”
“Because you sound like Wikipedia when you do it?”
“Fair enough… so okay, tell me why people who don’t make their mortgage payments shouldn’t end up in foreclosure. I’m on the edge of my seat over here.”
And so I began… back in 2009.
Ben & Mia Misled had purchased a home back in 2005, and like so many others, they were sold an Option ARM loan. They understood that if interest rates were to rise, the payments would go up, but they were also told that rates had been low for a long time, and that if they did start going up, the couple could always refinance to a fixed rate loan.
It seemed to make perfect sense, and they were soon moving into their dream home.
By 2009, however, nothing made sense anymore… the economy was falling off a cliff… and millions of people were losing homes to foreclosure, while millions more were losing their jobs. Mia Misleds read the many horror stories online, and many were about problems homeowners were having with Option ARM loans specifically … “Exploding ARMs,” they were being called.
And the couple started to get nervous that their mortgage payment might jump up by some large amount overnight and they feared that they could to lose their home someday as a result.
They were still making their monthly payments, and could have continued to make them without any problem, but they were having what I’ve come to refer to as, “interest rate anxiety,” which is the fear that interest rates will suddenly spike up, thus causing one’s mortgage payment to double or triple overnight.
I know about interest rate anxiety, because I can remember having it back then as well. All I had to do was read a couple of articles about Option ARMs and before I knew it, I was having nightmares about losing my home to foreclosure after my mortgage payment shot up from $2500 to $10,000 overnight.
Of course, it was a totally irrational fear, I learned from a friend of mine who is also a mortgage expert, and for a couple of reasons. For one, because Option ARMs all have limits on how much they can rise in any single year, and then there’s a cap on how high they can ultimately go, and for another, because interest rates proceeded to go down and stay down, for the most part, ever since.
I remember how silly I felt when, after ranting about the evils of Option ARMs for several months, my payment adjusted… and by that I mean it went down by about $1,000 a month.
Ben & Mia Misled, however, weren’t as fortunate as I was, they didn’t have a friend who could talk them down as related to their mortgage, and all they knew is that they had planned to refinance when they bought the home, and they wouldn’t be able to sleep until they had a fixed rate loan, as opposed to the one they had that might shoot up at any moment.
So, they contacted their bank, First National Infidelity, and asked if they could refinance their jumbo Option ARM to a fixed rate loan… and we should all know how well that conversation would have gone in ‘09, because no one was doing jumbo loans back then, even if there was enough equity to refinance to a fixed rate.
But, the bank’s representative in Mumbai wouldn’t have known how to explain any of that to Mr. & Mrs. Misled at that time, so all they were told was that they could apply to have their loan modified, and get a fixed rate that way. They asked how to go about applying for a modification and were told… wait for it… that they had to be at least 60 days delinquent before the bank would even consider them for a modification.
What First National Infidelity’s representative didn’t mention was that addressing the interest rate anxiety of an Option ARM loan for over a million bucks, was not really seen as much of a hardship, as far as the bank was concerned… certainly not as compared with the millions of homeowners with more acute hardships, unable to pay their mortgage payments, and desperate to save their homes from foreclosure.
You see, back in 2009, 2010, 2011 or 2012, First National Infidelity was, shall we say, not at its best when helping homeowners in general… but especially when trying to help those with issues outside the norm as defined by the government’s Home Affordable Modification Program, or HAMP… no way was this going to go well for the Misleds.
And sure enough… it didn’t. After going two payments behind in order to apply for a loan modification, they soon found themselves on the loan-modification-go-round along with millions of other Americans, each there for their own specific reason, but all having quite a bit in common as well. They’d send in their documents, and they’d be lost, and they’d send them in again, and they’d be lost again… and after a few more times around the dance floor, the Misleds received their first foreclosure notice.
“What in the world… why would we be in foreclosure? We’re just trying to switch to a fixed rate,” they cried.
Not to worry, is what they and millions of others were told by bank representatives.
It had to be a mistake… an error… a screw-up… is what they must have been thinking. And they were right… it was a mistake… just not on the part of who they were thinking had erred.
They asked if they could just start making their payments again, but the bank’s representative admonished them not to do so… if they did that, they’d be immediately denied for their loan modification.
Can you guess what happened next? I bet you can. The Misleds hired a lawyer to help them, and after a few months, found themselves in mediation. The bank’s lawyers, didn’t seem to have the same impression of what “mediation” meant. They simply refused to modify the Misled’s loan under any circumstances. One of the lawyers for the bank even said that the bank wanted to own a home in the Misled’s highly desirable neighborhood.
Well, them were fightin’ words as far as the Misleds were concerned, and so shortly thereafter, when the couple received a Notice of Sale, meaning that in 20 days, their home would be sold at an auction, they were ready to push back. And since the only way they could stop the sale from happening was to file bankruptcy, that’s precisely what they decided they would do.
They had long since given up on the fixed rate idea, now they just wanted to find a way to keep their home, and their bankruptcy lawyer said he could help. He would not only take care of their bankruptcy filing, and stop the sale of their home, he would also help them get their loan modified… in fact, he said knew people at First National Infidelity.
Maybe he banked there and was flirting with a teller, because whomever he knew there wasn’t doing anything discernable to move things in any direction, let alone the right one. As the months passed by in 2012, it became clear that he wasn’t having any better luck with their loan modification than they had over the last 18 months…
… and soon an official looked notice arrived… their loan’s servicing had been transferred to a new servicer, MIV Loan Servicing, which stood for: “Mammoth, Indifferent & Vile.”
And the camel’s back broke…
Their lawyer recommended that they file a lawsuit… and so it came to pass that Ben & Mia Misled, who had never missed a mortgage payment in their lives, and only wanted to refinance in order to get a fixed rate, something they would have almost no problem doing today by the way, found themselves in federal court sitting at the plaintiff’s table in a lawsuit against First National Infidelity Bank and MIV Loan Servicing.
Their first complaint was dismissed without prejudice, as was their second. And right about then, only a month before they were to file their third amended complaint because, I suppose, their lawyer believes that the third time’s a charm, they found Mandelman Matters, sent me an email, and soon we were talking on the phone like old friends.
All they wanted to do was save their home, which seemed to me to be a reasonable thing for them to want since there was no question that they had enough income to make their mortgage payment. They never should have been in this situation and wouldn’t have been had their bank been able to communicate using “The English.”
All someone would have needed to tell them was that they wouldn’t be able to refinance or modify at that time, but to check back in a year or two. Until then, interest rates would not be going up, so they shouldn’t worry about that either. And that would have been that.
Instead, their bank invited them to apply for a loan modification, just like President Obama had described in his speech on February 18, 2014, when he introduced his Making Home Affordable program, calling it a program that would prevent 5-7 million “responsible homeowners” from losing homes to foreclosure. It didn’t sound dangerous then, but it sure became a danger as implemented.
Once they started down the path, there was no turning back, and with very few places from which to obtain knowledgeable advice, along with scams on almost every corner and a government with the communication skills of a ferret, it was a true American tragedy on a scale I never thought I’d see in my lifetime.
“Now do you see how it happens?” I asked my Renter-friendly, city-dweller friend.
“That’s just beyond contemptible,” he said bluntly. “And you’re saying this sort of thing happens frequently… even today?”
“Ummm… well, I don’t hear about it happening more than a couple of times a day,” I replied sarcastically. “And it’s not the only way it happens. Sometimes it happens for even dumber reasons. I’ve seen Wells Fargo get someone into foreclosure as a result of not paying $20 in late fees, and I’m not kidding about that.”
“Shut the front door.” That wasn’t exactly what he said, but this article is rated ‘G’ so that will have to do for now. “So, are you going to save them… somehow convince the bank that their home should not be in foreclosure, even though they haven’t made a payment in over two years?”
“Something like that,” I replied.
“That’s got to be a tough argument to win. You’ll have to find a banker who doesn’t have ADD… do they even make those?
“I only present the Banker’s Digest version,” I explained.
“How does that version go?” He sincerely wanted to know.
“It’s quite a bit shorter, money reference thrown in every 10 seconds to keep their attention.”
“Basically I just make sure the bank knows they make enough money to cover the modified payment… I explain how they got into their current situation… and that they really do want to keep their home,” I said being quite serious. “That usually covers it. A lot of people simply slip through the cracks for any number of reasons.”
“And that accomplishes something?”
“I’m a very persuasive person.”
“I never thought so. Why don’t I see stories like this on T.V… 60 Minutes or The View, or whatever?” (I couldn’t believe he mentioned The View.)
“Because people don’t want anyone to know when they’re at risk of losing a home to foreclosure… they don’t tell their friends, family members, co-workers, no one… so they’re certainly in no hurry to tell their stories on T.V. They’re ashamed and embarrassed… you know… like you should be over watching The View?”
“Don’t you dare make disparaging comments about my girls on The View, betch. That’s my program.”
Our conversation shifted slightly. He had recently read a few of the letters that homeowners have written to thank me for helping them get their loans modified, and he couldn’t understand what was going on that all of these homeowners could be having so much trouble working with their banks over several years, and then somehow I was able to step in and do something that helped them get their loans modified.
I explained… “The whole thing is a bit like someone blindfolding you, spinning you around a few times, and then pushing you forward down the middle of the interstate as you attempt to find a donkey on which to pin a tail without inadvertently changing lanes and spending the rest of your day as a grill ornament.”
“That was perhaps a bit too vivid. I’d dial it down around children, if I were you.”
At the core, you have to realize that loan modifications never really existed before. There were no systems in place, each investor has their own set of rules and restrictions where modifications are concerned, and training customer service representatives has proven to be exceptionally difficult in the face of continually changing servicing standards and guidelines.
Foreclosures, on the other hand, when someone doesn’t make his or her mortgage payments, are the norm. There’s a huge, dumb machine that’s been designed and built to send out statements, collect and post payments… and outsource the foreclosure to some law firm when someone doesn’t pay, according to the terms of the Pooling & Servicing Agreement (“PSA”).
That machine has been in operation for a long time, doing what it was designed to do… foreclose. We’ve never had a situation like the one we face today, ever. So, we don’t have anything in place to fix it, nor have we had the political will to do anything FDR-like to correct the problem.
And into that mix throw, homeowners who are angry, emotional, and unfamiliar with any of what’s involved, many scared to death that their homes will be sold at any moment and filing lawsuits and bankruptcies out of desperation… some are rich and some are poor, this crisis doesn’t discriminate, but those answering the phone at servicers can hardly be expected to turn such a toxic brew into sweetened lemonade.
“There’s so much more I could say about loan modifications, but I think I’ve already blown past the Reader’s Digest version limits, so I’ll leave it there,” I said in conclusion. In a nutshell, it’s a titanic mess.
“So, what is it that you do that they can’t do?” He wanted to know.
I said, if I told him… I’d have to kill him.
“Oh funny, I’ve never heard that one before. We’re you in the CIA?”
“The process often benefits from having someone in the middle with a brain that knows both sides, knows how we got here, and cares about making sure that people get a fair deal. Oh, and it helps if you speak banker and have a blog with thousands of readers every month.”
“I read one of the letters a homeowner wrote to you, and she said that she called you a week before she was going to be evicted. And you saved the day. Look, I think it’s great that you can help people like you apparently have been able to, but I don’t understand why you can do it and they can’t.”
“It’s all part of another really long story, I’m afraid,” I said, this time not wanting to tell it.
“How about just the Banker’s Digest version… pretend you’re talking to a banker. Please…”
“Oh hell… okay, here’s the deal in a nutshell.
Foreclosing is the norm. It’s loan modifications that are the anomaly. The system is built to foreclose… there is no system to modify loans. And servicers work on a very small margin, like they get 50 basis points a year… half a percent… for servicing a loan. So, let’s say the loan is $100,000… half a percent is $500… per year… about $40 a month.
The thing is that if a servicer modifies a loan improperly, meaning outside the guidelines of the PSA, they can end up having to buy the loan back, which can mean paying out six figures for something on which they make $500 a year. Yeah, they get late fees and whatever, but the point is that while they don’t make much money servicing a loan, they sure lose a lot if they do anything wrong.
Beyond being concerned with adhering to the rules of the PSA and the government program, servicers are concerned about re-default. Re-default is the worst possible outcome for any servicer, and it’s not easy to determine which borrowers will and won’t default after their loans have been modified.
So, I think more than anything, it’s about understanding what’s happened from all sides, from the different perspectives… it’s like in this country we call it, “The Mexican American War.” But in Mexico, they call it: “The U.S. Invasion of Mexico.” Get it?
“¡Sí señor!” He said it sounding kind of like a Cuban dictator from the Bronx.
Very good, ¿estudió español en la escuela? I said, using my best Frito Bandito accent.
“Oh yeah, I estudiod plenty in and out of la escuela. Yes sir, I was estudioing day and night. In fact, I think I got a degree in Tequila Studies from Senior Frogs in Cancun one year. There was this blond chica, oh my Lord…”
“Okay, that’s enough. I plan to eat something after we hang up and I don’t want you to spoil my appetite with your tales of depravity from South of the Border.”
“Alright my amigo, hey… thanks for calling. Coming out here any time soon? Let me if you do, I’ll bake a cake for your arrival or something like that.”
“Will do,” I assured him.
“And get back to saving the country, will you please? And tell your homeowners I said… make your mortgage payments, damn it.” (Don’t hate him, he’s an idiot.)
“I’m sure they’ll love hearing that from a 53 year old lawyer who can’t drive a car and refers to women as “chicas.” I don’t even think that’s the right word… never mind. We’ll talk soon…”
“Cool, I want to hear more, letters-from-the-front-lines-of-the-foreclosure-war type stuff, okay. You’re my favorite story teller always have been, you know that.”
Good bye, counselor. Lo siento. Que se mejore pronto.”
“Yeah, yeah… vaya con Dios, and Feliz Navidad.”
So, now you know the story too… just one of the many ways people end up in foreclosure without doing anything wrong. And it happens all the time.
The whole loan modification process has been an inconceivable mess from the day it began in 2009. The truth is, the whole thing never really had a chance… it was doomed from the very beginning. Congress has proven unwilling to do anything about the situation, and that’s what it would take to really fix the federal program.
So, if you want to see it made better, if you want to see things change, remember… this is an election year, and that means your elected representatives all will be coming home to their respective districts soon to campaign for your vote, and the votes of others all around you.
Elections are won one vote at a time, and they’re lost the same way. So, this is the year to write your representative and tell him or her how you feel about what’s been going on. It’s one of the most powerful things we can all do to influence our political process in this country.
Get 50 people to write in on the same topic and you may see the issue come up on C-Span. Get a couple hundred and things start to change. Always remember, politicians don’t see the light, until they feel the heat.